invic

Which of the following will NOT encourage international market integration?

A) International political stability.

B) Absence of trade restrictions.

C) Widespread use of the international capital asset pricing model (ICAPM).

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Widespread use of the ICAPM will not enhance market integration. If markets are integrated, then the ICAPM will be a useful model for international asset pricing.

invic

International market integration requires significant international capital mobility. In terms of volume of transactions, what has happened to international capital flows over the past two decades?

A) As a percent of domestic gross domestic product (GDP), international capital flows have remained constant.

B) International capital flows have increased modestly.

C) International capital flows have increased dramatically.

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The past two decades have witnessed large increases in the volume of international capital flows.

invic

Which of the following is NOT a factor that favors international market integration?

A) Many institutional investors diversify internationally.

B) Governments borrow and lend internationally.

C) International tax laws are determined by the International Monetary Fund (IMF).

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There is little in the way of uniform international tax law. Further, the IMF does not determine tax law. The other factors listed promote market integration.

invic

If the international markets are segmented, which of the following is most accurate?

A) Risk will not be priced the same in all markets.

B) The international capital asset pricing model will still be valid.

C) The extended capital asset pricing model must be used to price international assets.

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If markets are segmented, then assets with similar risk/return parameters will not necessarily be priced the same.

invic

Which of the following is NOT an impediment to international capital mobility?

A) Psychological barriers.

B) Model risk.

C) Discriminatory taxation.

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The impediments to international capital mobility do not include model risk. Model risk exists in all markets.

invic

Which of the following is considered an impediment to international capital mobility?

A) Foreign currency risk.

B) Greek risk.

C) Market risk.

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Foreign currency risk is an impediment to international capital mobility. The other risks listed exist in any market, domestic or international (note: Greek risk refers to derivative securities models).

invic

John Swanson is an economic advisor for the international division of BMC Investments. He has been asked to gather economic data and present a seminar to other analysts regarding international economic concerns. The following three issues were raised in the seminar. Choose the most reasonable statement that Swanson should make in replying to the questions raised.The issue of growth rates across various countries was discussed and there was some disagreement regarding future expectations for growth rates across countries. Which of the following statements most accurately describe expectations of future growth rates under neoclassical theory?

A) The best method for measuring the difference in growth rates internationally is using endogenous growth theory.

B) Conditional convergence is predicted for countries with similar economic attributes, including savings and population growth rates.

C) High-growth countries that have historically made high investment for growth will ultimately enter a steady state.

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Under neoclassical theory the concept of convergence implies that high-growth countries that have historically made high investment for growth will ultimately enter a steady state. Absolute convergence, not conditional convergence, is predicted for countries with similar economic attributes, including savings and population growth rates. There is empirical evidence to suggest that countries that invest more will grow faster, but the accelerated growth is not permanent. Endogenous (new) growth theory is not of much value in explaining differences in growth rates internationally.

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The vice president of equity analysis believes that Japan is an integrated world market with few impediments to international flow of capital. Which of the following factors would NOT cause Swanson to question the international efficiency of Japan?

A) The gross domestic product (GDP) is less for Japan than the local GDP.

B) Foreign currency risk is not completely hedged away.

C) The accounting system in Japan is not in accordance with Generally Accepted Accounting Principles (GAAP).

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The level of GDP is not a factor in questioning the international efficiency of a country. In addition to the other factors mentioned in this question, there are several other impediments to international flow of capital. The six potential impediments to international flow of capital are psychological barriers, legal restrictions, transaction cost, discriminatory taxation, political risks, and foreign currency risk.

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Swanson has reason to believe that Japan will soon be making monetary policy changes that will cause the yen to suddenly depreciate 1%. If the value of a Japanese firm falls when the yen depreciates, the asset return and currency movement are:

A) negatively correlated from a U.S. investor's perspective which exaggerates the currency movement impact.

B) positively correlated from a U.S. investor's perspective which lessens the currency movement impact.

C) positively correlated from a U.S. investor's perspective which exaggerates the currency movement impact.

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If the value of a Japanese firm falls when the yen depreciates, the asset return and currency movement are positively correlated from a U.S. investor’s perspective, and this exaggerates the currency movement impact.